While factors that impede Madrid’s recovery of domestic demand “are not unique to Spain,” S&P said “they impact Spain with particular force given its high level of private sector leverage, much of which is funded externally.”

The move took a bite out of the euro in Asian trade Friday, and prompted fresh questions about how to contain the eurozone’s debt crisis, just days after France and Germany vowed to hammer out a blueprint to tackle the problem.

“Given the size of the Spanish economy and outstanding debt, the downgrade will keep contagion risk high and risk sentiment down,” said Andy Ji, a currency strategist at Commonwealth Bank of Australia.

However some analysts said the downgrade was “already expected”.

“Now the market is looking toward expected capital injections by governments in the eurozone, which would be supportive for the euro,” said Koji Fukaya, director of fixed income and global foreign exchange research at Credit Suisse.

The euro bought $1.3756 and ¥105.75 in Tokyo morning trade, down from $1.3783 and ¥105.92 in New York late Thursday.

The dollar was flat at 76.85.

The Spain move followed a warning from the French finance ministry Thursday that European lenders will likely be forced to write off more Greek debt than the 21% proposed in a July accord on a second bailout for Athens.

In a briefing ahead of this weekend’s G20 finance ministers’ meeting in Paris, officials said EU states would set up a mechanism to allow banks in difficulty to seek assistance but that the statutes of the European Financial Stability Facility (EFSF) would not change.

Lenders have been asked to increase their core capital reserves so they can better cope with any losses on their holdings of weak eurozone state bonds.

Slovak lawmakers on Thursday approved an increase in the EFSF bailout fund to €440 billion, as had been expected.

Slovakia, the last country in the 17-member eurozone to ratify the fund designed to help debt-mired nations, held a second vote after a failed attempt Tuesday.

Data showed Friday that China’s consumer price index rose 6.1% in September, down from 6.2% in August, following government efforts to tame inflation in the world’s second-biggest economy.

Inflation hit a more than three-year high of 6.5% in July, stoking concerns about social unrest sparked by rising costs.

However, Daniel So, an analyst at SHK Financial, said: “I don’t believe that there will be a softening of China’s monetary policy such as a reserve requirement ratio cut over the weekend, which may disappoint some bulls.”

On oil markets New York’s main contract, light sweet crude for November delivery, fell 11 cents to $84.12 per barrel, while Brent North Sea crude for December delivery dipped one cent to $111.10.